The Contribution of Innovation to Health Care Costs: At Least 50%?

The Contribution of Innovation to Health Care Costs: At Least 50%? by Rosa M. Abrantes-Metz (Global Economics Group, LLC; New York University – Leonard N. Stern School of Business – Department of Economics)

Abstract:      

This paper is primarily concerned with estimating an upper bound for the contribution of technological progress on health care costs as motivated by the recent debate on U.S. health care reform. We critically address whether technology is at least 50% of the increase in health care costs as proposed recently in the literature. The desire to reduce costs in the health care system combined with estimates that technological change is the major contributor to those costs has led some to propose policies with the ultimate effect of discouraging innovation in health care technology. In this paper we show that more appropriate econometric procedures lead to estimates of technology’s role in health care costs which are significantly less than other published results.

Using only U.S. time-series data we estimate an upper bound for the contribution of innovation to health care costs. Our model follows that of the Congressional Budget Office’s (CBO) 2008 report and uses identical data, but finds that the contribution of technological progress is 32.3% – significantly smaller than what the CBO estimates. Even this value can only represent an upper bound, as there remain important factors which have been omitted from the study primarily due to data unavailability.